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11 Apr 2013
Forex Flash: Hopium v reality is a big currency basis correction - Societe Generale
FXstreet.com (Barcelona) - Sebastien Galy, Senior FX Strategist at Societe Generale has taken a look at the post Japanese securities flow post mortem.
He begins by writing, “We care because it may be an indication of positioning on the US markets as well as the difference between a theme of Japanese Hopium on which the market merrily swims and reality. The difference between the two is leading the back end cross currency basis to correct sharply {JYBS5 CMPN Curncy}. Skittishness at the 30Year JGB auction suggests that Japanese Hopium works better on foreigners, still busy buying Japanese equities.”
He notes that he has learnt that the weekly data covered only one day post BoJ meeting and showed net selling of foreign bonds by Japanese investors. Also, he adds that flows were observed in European bond markets (France, Belgium, Holland..), Mexico and even South Africa. Galy also notes that some sources now report that some of this activity was extension of duration of existing positions (Italy). Overall, the big unknown remains the UST market. There, he is receiving reports of selling of UST which would make sense but for the purpose of investing in this week’s auctions (30Year auction on 04/11). Mostly, he feels that there is a fairly complete blackout of information on the US bond market. Japanese sources report a very confusing picture without much consistency in spot from Japanese names. He finishes by writing, “Overall, the market is selling JPY crosses across the board. FX futures the back end panicked as they feared incoming supply and is now rapidly correcting. In vol space, risk reversals have made a move sharply higher which might suggest this is the way many investors (including Japanese names) have been positioning themselves.”
He begins by writing, “We care because it may be an indication of positioning on the US markets as well as the difference between a theme of Japanese Hopium on which the market merrily swims and reality. The difference between the two is leading the back end cross currency basis to correct sharply {JYBS5 CMPN Curncy}. Skittishness at the 30Year JGB auction suggests that Japanese Hopium works better on foreigners, still busy buying Japanese equities.”
He notes that he has learnt that the weekly data covered only one day post BoJ meeting and showed net selling of foreign bonds by Japanese investors. Also, he adds that flows were observed in European bond markets (France, Belgium, Holland..), Mexico and even South Africa. Galy also notes that some sources now report that some of this activity was extension of duration of existing positions (Italy). Overall, the big unknown remains the UST market. There, he is receiving reports of selling of UST which would make sense but for the purpose of investing in this week’s auctions (30Year auction on 04/11). Mostly, he feels that there is a fairly complete blackout of information on the US bond market. Japanese sources report a very confusing picture without much consistency in spot from Japanese names. He finishes by writing, “Overall, the market is selling JPY crosses across the board. FX futures the back end panicked as they feared incoming supply and is now rapidly correcting. In vol space, risk reversals have made a move sharply higher which might suggest this is the way many investors (including Japanese names) have been positioning themselves.”